Rising interest rates making Bay Area even less affordable

Few homes for sale, high prices, fierce bidding wars – and now higher interest rates – have seeped into the Bay Area real estate market.

Rising interest rates have pushed monthly payments for buyers up nearly 7% in the last month, and more increases could be on the way.

The Federal Reserve signaled this week it could raise the target rate for borrowing funds at its March meeting. The average rate for a fixed, 30-year mortgage has climbed from 3.05% on Dec. 23 to 3.55% on Jan. 27, approaching its highest level during the COVID-19 pandemic.

But local real estate professionals say the impact of higher rates could be muted for many in the Bay Area – where most buyers are wealthier, have higher incomes and can fit the increase into their budgets. “Most of our borrowers in the Bay Area are extremely well-heeled,” said Jay Voorhees, owner of JVM Lending in Walnut Creek. “They’re extremely well-qualified.”

A tick-up in interest rates might cost a borrower an extra $150 a month on a $500,000 loan – not an onerous amount for buyers looking at a multimillion-dollar home, Voorhees said. The median sale price for single-family homes in the nine-country region topped $1 million last year and has risen above $1.5 million in San Francisco, Santa Clara and San Mateo counties.

The Bay Area’s high prices mean almost all buyers in the region must qualify for “jumbo loans” – with amounts exceeding $970,800 – which have more stringent financial requirements but generally carry lower interest rates. Jumbo loans now typically have interest rates about a half-percentage point lower than a standard mortgage.

Still, the creep-up in interest rates along with rising Bay Area home prices make the region even less affordable for many families. In September, just 1 in 5 Bay Area families could afford to buy the median-priced single-family home in the region, according to the California Association of Realtors. A decade ago, about 45% of families could make a purchase.

The average monthly payment for a new mortgage on a median-priced home in San Francisco and the East Bay rose by $924 a month between January and December 2021. In the San Jose metro area, average payments for a median-priced home climbed up to $1,265 a month, according to a Zillow analysis.

In San Francisco and the East Bay, Zillow estimates the typical home value rose 17% in 2021, from $1.17 million to $1.37 million. In Santa Clara County, the median home value also rose 17%, from $1.31 million to $1.54 million.

Zillow senior economist Jeff Tucker said the rise in interest rates came more suddenly than many predicted. U.S. home prices also rose to record levels last year, driven up by low inventory of houses for sale and intense demand by first-time buyers and families seeking more space to accommodate remote work schedules.

Higher prices and climbing interest rates, he said, are “just a one-two punch to buyers.”

Tucker noted that interest rates were still near record-low levels. The uncertainty of future rate hikes could push more buyers into the market. “Home shoppers are also in the dark about where rates will go,” he said.

Agents say the pandemic boom in Bay Area residential real estate has followed big stock market gains, boosting the incomes of tech professionals. The expected interest rate hike has sent stocks reeling – and clouded the home-buying plans for professionals who were relying on company equity grants and programs to fund part of their purchases.

Demand remains strong and the choices for buyers have rarely been more scarce.


Leave a Reply

Your email address will not be published.